Illustrative Problem on CONTINGENT CONSIDERATION AND MEASUREMENT PERIOD

(Adapted)

On December 31, 2020, XANDER Corporation entered into a business combination by

acquiring the assets and assuming the liabilities of FORD Corporation in which FORD Corp
will be dissolved. The consideration transferred by XANDER consists of the following:

● 30,000 unissued shares of its P10 par ordinary shares, with a market value of P25 per
share
● P180,000 in long term 8% notes payable and
● A contingent payment of P120,000 cash on January 1, 2023, if the average income of
the 2 year period of 2021 – 2022 exceeds P 300,000 per year. XANDER estimates
that there is a 30 percent chance or probability that the P120,000 payment will be
required.

In addition, XANDER pays the following at the time of the merger:

● Finder’s fee P120,000

● Accounting fees, P 24,000
● Legal fees to arrange the business combination P 42,000
● Cost of SEC registration for shares issued, including accounting and legal fees P
18,000
● Indirect costs of combining, including allocated overhead and executive salaries P
27,600
The Statement of Financial Position and fair value information for the two companies on
December 31, 2020, immediately before the merger, were as follows:

XANDER FORD
Account Titles Book value Fair value Book value Fair value
Cash 24,000.00
276,000.00 276,000.00 24,000.00
Receivables – net 48,000.00
96,000.00 96,000.00 48,000.00
Inventories 120,000.00
288,000.00 360,000.00 72,000.00
Land 72,000.00
108,000.00 240,000.00 240,000.00
Buildings – net (10 year life) 240,000.00
480,000.00 720,000.00 360,000.00
Equipment – net (15 year life) 216,000.00
432,000.00 588,000.00 300,000.00
In process research and
- - -
development 60,000.00
Total Assets 720,000.00
1,680,000.00 2,280,000.00 1,104,000.00

Accounts payable
216,000.00 216,000.00 72,000.00 72,000.00
Other liabilities 144,000.00
240,000.00 216,000.00 168,000.00
Ordinary shares, P10 par 240,000.00
720,000.00
Share premium 192,000.00
240,000.00
Retained earnings 72,000.00
264,000.00
Total liabilities and equity 720,000.00
1,680,000.00

REQUIREMENTS:
 I. CONTINGENT CONSIDERATION BASED ON FUTURE EARNINGS WITH
MEASUREMENT PERIOD RULE APPLICATION

A. Assume that on August 31, 2021 because of improved information about facts and
circumstances that existed at the acquisition date, the contingent consideration
was revised to an expected value of P 60,000.

1. Determine the amount of goodwill that will be recorded on December 31, 2020.

2. Determine the amount of adjusted goodwill (if any) that will be recorded as adjustment
on August 31, 2021.

B. As continuation of letter A, assume that on November 1, 2021, the probability value

of the contingent consideration amounted to P48,000:

3. Determine the amount of adjusted goodwill (if any) and journalize the adjustment on
November 1, 2021 if any.

C. As continuation of letter B, assume that on December 15, 2021, the expected value
of the contingent consideration amounted to P 78,000:

4. Prepare the required entry to reflect the adjustment, if any. Determine the amount of
adjusted goodwill (if any)

D. As continuation of letter C, assume that on January 1, 2023, XANDER’s average

income in 2021 is P324,000 and 2022 IS P312,000, which means that the target was
met:

5. Prepare the required entry to reflect the adjustment, if any. Determine the amount of
adjusted goodwill (if any)

II. CONTINGENT CONSIDERATION BASED ON PRESENT VALUE OF FUTURE

PERFORMANCE – CASH FLOWS WITH MEASUREMENT PERIOD RULE APPLICATION
A. Going back to the original problem above and assuming that FORD Corporation will
generate cash flows from operations of P360,000 or more in 2021. FORD estimates
that there is a 35% chance that the P 120,000 will be required. FORD Uses an interest
rate of 4% to incorporate the time value of money.

1. Compute the amount of goodwill that will be recognized on December 31, 2020

B. Continuation of A. On December 31, 2021, FORD Corporation’s cash flow from

operations amounted to P336,000, which means that it did not exceed the cash flows
from operations threshold of P360,000, therefore, there is no cash payment to be made
to FORD Corporation:

2. Determine the amount of adjustment to goodwill if any.

3. Prepare the required entry if any.

Solution to XANDER & FORD Co

III. CONTINGENT CONSIDERATION BASED ON FUTURE EARNINGS WITH
MEASUREMENT PERIOD RULE APPLICATION
A.
# 1. Determine the amount of goodwill that will be recorded on December 31, 2020.

Consideration transferred;
Ordinary shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash
contingency): 36,000
P120,000 x 30% probability
Total Consideration P 966,000
Less: Fair value of identifiable assets
acquired and liabilities assumed:
Cash P 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Accounts payable ( 72,000)
Other liabilities ( 168,000) 864,000
Positive Excess – Goodwill P 102,000

#2

Determine the amount of adjusted goodwill (if any) that will be recorded as adjustment
on August 31, 2021.
The goodwill to be reported then on the acquisition should be P126,000 (P102,000 +
P24,000).

The adjustment is still within the measurement period, the entry to adjust the liability would
be:
Goodwill 24,000
Estimated liability for contingent 24,000
consideration
Adjustment to goodwill due to measurement
date.

In this case, the measurement period ends at the earlier of:

● one year from the acquisition date, or
● the date when the acquirer receives needed information about facts and
circumstances (or learns that the information is unobtainable) to consummate
the acquisition.

#3

On November 1, 2021, the probability value of the contingent consideration amounted

to P48,000, the entry to adjust the liability would be: The goodwill to be reported then on
the acquisition should be P126,000

Estimated liability for contingent consideration 12,000

Gain on estimated contingent 12,000
consideration
Adjustment after measurement date.

#4

The goodwill remains at P126,000, since it was not expressly stated that the change is
due to improved information on facts and circumstances already existing on the date
of acquisition.
 On December 15, 2021, the entry would be:

Loss on estimated liability contingent 30,000

consideration
Estimated liability for contingent 30,000
consideration
Adjustment after measurement date.

#5

On January 1, 2023, FORD’s average income in 2021 is P324,000 and 2022 is P312,000,
which means that the target was met, XANDER Corporation will make the following
entry:

Estimated liability for contingent consideration 78,000

Loss on estimated contingent consideration 42,000
Cash 120,000
Settlement of contingent consideration.

The goodwill remains at P126,000.

IV. CONTINGENT CONSIDERATION BASED ON PRESENT VALUE OF FUTURE

PERFORMANCE – CASH FLOWS WITH MEASUREMENT PERIOD RULE APPLICATION

A.
1. Compute the amount of goodwill that will be recognized on December 31, 2020

Consideration transferred;
Ordinary shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 35% probability x (1/[1 + .04]*) 40,385
Total P 970,385
 Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Goodwill P 106,385

B.

1. Determine the amount of adjustment to goodwill if any.

2. Prepare the required entry if any.

1. Goodwill remains at P106,385.

2. The entry for XANDER Corporation on December 31, 2021 to record such occurrence
would be:

Estimated liability for contingent consideration 40,385

Gain on estimated contingent 40,385
consideration
Adjustment after measurement date.

Since the contingent event does not happen, the position taken by IFRS 3 is that the
conditions that prevent the target from being met occurred in a subsequent period and that
XANDER had the information to measure the liability at the acquisition date based on
circumstances that existed at that time. Thus the adjustment will flow through income
statement in the subsequent period.

-END of PROBLEM-